Microsoft's $7.2 billion deal to buy ailing smartphone maker Nokia will likely do little to change one basic problem these two companies face: No one seems all that interested in their flagship phones, the Nokia-made Lumia line, which runs Microsoft software.
The issue people have with the phones has little to do with their design or how they're marketed, two areas Microsoft has promised to prioritize following its Nokia deal. Instead, buyers will often try the Lumia smartphones, then abandon them, wondering why they can’t access Instagram, play Candy Crush or download thousands of other apps readily accessible on Android and Apple phones.
“[Customers] say it has no apps and so it’s useless,” said a sales associate at Verizon's Sixth Avenue store in Manhattan, echoing an explanation given by employees at AT&T and T-Mobile stores around New York City.
She estimated that 7 out of 10 Verizon customers who buy Microsoft-powered phones end up returning them for a different device.
Despite their earlier dominance in desktop computers and cellphones, Microsoft and Nokia are both struggling to stay relevant in the smartphone age, so far with little success. Late to offer a competitive alternative to the iPhone, and by then also facing pressure from Google's Android operating system, Microsoft’s share of the worldwide smartphone market has dropped to a paltry 3.3 percent, from 11 percent in 2008, according to the Gartner Group. Nokia, a brand once synonymous with cutting-edge gadgets, has likewise lost its hold on consumers.
Microsoft and Nokia are now trying to convince the world that uniting two companies that missed the mark in mobile can somehow yield a company capable of chipping away at Apple and Google’s dominance. Two wrongs really can make a right, their executives insist.
Yet the main reason people decide against purchasing a Microsoft Windows Phone -- the dearth of apps -- is unlikely to change immediately following the deal, analysts say.
“The app ecosystem is the least likely to benefit from this merger,” said Chris Silva, an analyst with the Altimeter Group. “With good-enough marketing, you can probably get people on board, but the app ecosystem is what’s going to keep them there.”
Microsoft’s Windows Phone platform offers just a fraction as many apps as its rivals: There are 160,000 Windows Phone apps, while Apple offers iPhone owners over 850,000 and Android more than 700,000.
“I’d like to say the combination of the two will give developers more confidence to put more resources into developing [apps] for Windows Phone,” added Silva. “But at the end of the day, it’s a numbers game.”
So far, that numbers game hasn’t worked in Microsoft’s favor. The tech giant is confronting the Catch-22 it has grappled with unsuccessfully for several years: People will only buy Microsoft's phones if the phones have access to apps. And app developers will only build those apps if enough people buy Microsoft’s phones.
In the most recent quarter, Microsoft shipped 8.7 million phones running its Windows Phone software -- a third as many phones as Apple, and a twentieth the number of phones shipped with Android, according to IDC. An AT&T sales associate observed that in his experience, the Lumia has so far sold best among first-time smartphone buyers and older individuals, both of whom seemed less concerned with having apps.
By Microsoft’s logic, the acquisition of Nokia will “accelerate phone share” by allowing the Redmond, Wash., giant to refine its marketing message and innovate more quickly. In combination, those efforts should drive sales, which should in turn motivate app developers, according to Microsoft’s chief executive Steve Ballmer.
“The key is to drive volumes. Driving volumes will activate the software and the hardware ecosystem,” Ballmer told The Verge in an interview. “We do see an ability to speed our agility in hardware and software innovation. We do think that making the brand and the product line simpler and easier to acquire and being able to invest with greater agility should do a lot to help us continue to improve our market-share and position, which certainly will help our apps."
Marketing might not be Windows Phone’s biggest problem. Though it doesn’t enjoy the name recognition of the iPhone or Galaxy S4, sales associates at AT&T, Verizon and T-Mobile said their customers are familiar with the Windows Phone brand, and frequently come in asking to see Lumia phones. A 2011 survey of mobile phone users who owned a smartphone or planned to purchase one found that 44 percent were considering devices running Windows Phone 7.
The larger issue may be that Microsoft and Nokia still think of their phones as phones. The phones' owners now expect them to be pocket-sized computers. While the two tech giants have focused on building feature-filled smartphones that can hold their own against the best from Samsung, Motorola, Apple and others, the people who'd buy those phones now take all those bells and whistles for granted. Intuitive design and high-quality cameras have become a given. The phone that wins isn't so much a phone as it is a convenient portal to services that offer instant gratification of every conceivable lifestyle demand, whether it's editing photos, streaming movies, finding dates or hailing taxis. All those capabilities rely on apps. Though Microsoft has bought itself a smartphone maker, the all-important developers -- and their apps -- aren't included.